Archive for the ‘Eye on the Legislature’ Category

See you next year. 81 days after 2015 ended, Iowa finally has its 2015 tax law. Governor Branstad yesterday signedHF 2433, adopting federal tax law changes for 2015, including the $500,000 Section 179 limit, but not including bonus depreciation.

While Congress enacted the $500,000 limit permanently last year — and indexed it for inflation — Iowa’s coupling is for one year only. That sets up a fight in the 2017 General Assembly not only over bonus depreciation, but over all of the other “expiring provisions” that Congress re-enacted in December.

How we got here. While Iowa’s income tax is based on federal income tax rules, it doesn’t automatically adopt federal tax law changes. Every spring the General Assembly passes a “coupling” bill where they choose whether to adopt federal tax changes made in the prior year. The Congressional habit of enacting important tax provisions for one or two-year periods — to pretend they cost less — has made the annual coupling bill an important part of the legislature’s work.

Since 2010, Iowa has adopted all federal tax law changes except for bonus depreciation. These have included the $500,000 Section 179 deduction for new asset purchases that would otherwise have to be capitalized and depreciated over a period of years — usually three to seven years. In recent years the coupling bill has been one of the first bills to go to the Governor.

This year is different. Governor Branstad surprised the Iowa tax world when he announced on January 13 that there would be no coupling for Section 179 for 2015, on the grounds that the state budget required the revenue. It soon came out that he opposed coupling for anything but the federal research credit. That would have made a major mess out of Iowa tax filing season, affecting a broad range of deductions, including:

His Republican partisans in the Iowa House of Representatives rebelled. A coupling bill that included Section 179 passed the Iowa house by month-end, 82-14. Notably, not only did all voting Republicans support the bill, but so did a large majority of Democratic representatives.

Yet the prospects for coupling at the time looked grim. Citing the Governor’s opposition, Senate Majority Leader Gronstal (D-Council Bluffs) was set to keep the House-passed bill from ever coming to a Senate vote.

But the natives were restless. The legislators heard from a lot of their constituents that they were unhappy to lose the deduction, which could be worth around $40,000 for many taxpayers. The Des Moines Register reported that “only” 25,000 taxpayers would have lost deductions under that, but that comes out to 250 grumpy business constituents and farmers for every Representative, and 500 per senator. It seems most of them got on the phone and called their legislator. Business groups such as the Iowa Association of Business and Industry pushed for coupling, as did Iowans for Tax Relief.

The message got through. By February 22, Governor Branstad reversed himself and decided Iowa could afford Section 179 coupling for one more year. That left Senator Gronstal as the remaining roadblock to coupling. He extracted a face-saving reduction in the sales tax exemption for manufacturing supplies that the Department of Revenue put into place last year — by accepting a version of the break that he blocked in 2014.

Now it’s time to catch up. The software vendors will scramble to update their tax prep programs to include the coupling, and we can finally start to move all of the Iowa tax returns that have been on hold awaiting the coupling.

Unfortunately, this coupling bill is only for one year — even though $500,000 Section 179 is now a permanent federal tax provision. We can expect both the Governor and Senator Gronstal to oppose Section 179 coupling in the next General Assembly. They have other priorities.

No sign yet. The Governor is back from his spring break, but nothing on the legislature’s web site indicates that he has signed HF 2433, the extender bill coupling Iowa to most 2015 federal tax law changes, including the Section 179 deduction. Meanwhile, it’s March 21 and we don’t know Iowa’s 2015 tax law yet. There’s nothing about signing the bill on the Governor’s calendar or press release site.

The Governor is scheduled to sign the “Dixie Cornell Gebhardt Week proclamation” this afternoon. Per Wikipedia, Dixie Cornell Gebhardt “was a leader of the Daughters of the American Revolution in Iowa during World War I, and was responsible for the design of the Iowa’s state flag.”

“I’m pleased that the Legislature was able to come together and reach a consensus on this bill. I support coupling for one year and placing into Iowa Code an exemption for supplies consumed in manufacturing from the sales tax that will help Iowa taxpayers and businesses,” said Branstad. “Although I am disappointed that the exemption does not go as far as the administrative rules that were passed through the Administrative Rules Review Committee earlier this year that dealt with advanced manufacturing, I’m proud to sign the bill that moves Iowa forward on both of these key issues.”

Sooner is better Governor. It’s March 21, and the software companies all have to do an update after you sign.

Biology. The Senate last week passed yet another special interest tax credit, the “Renewable Chemical Production Tax Credit” (SF 2300). It flew through the Senate 46-3, and it is expected to pass the House easily.

“The new program narrowly targets a single industry. You hear often, especially from the Republican side, that we shouldn’t try to pick winners and losers, while this is trying to pick a winner and a loser,” Quirmbach said.

According to Quirmbach, there are only two possible outcomes if this bill is allowed to move forward.

“No. 1, the industry is going to be a success, maybe the boosters are right about how much income and wealth are going to be generated. In that case, why do they need a government handout? Or it’s going to be a failure. In that case, why do we want to flush taxpayer money down the drain,” Quirmbach said. “Either way, this is something the government shouldn’t be involved in. Markets are good at this, government is generally pretty bad this.”

This is exactly right. It’s worth noting that Sen. Quirmbach was one of only two senators to vote against the disastrous Iowa film tax credit program. I also note that all Republicans voted in favor of the vote, showing again the weakness of the Iowa GOP’s free-market inclinatations.

Leslie Book, Riley Out of Luck on Theft Loss Deductions (Procedurally Taxing). “The opinion also walks through the reasons why Riley was not entitled to either a nonbusiness bad loss deduction or a deduction for worthless securities.”

Sometimes training isn’t enough. A taxpayer whose case was decided this week in Tax Court seems well equipped to fight the IRS:

Petitioner holds a bachelor of science degree in accounting and a master’s degree in tax law. During each year in issue petitioner was licensed in California as a real estate broker and was qualified to represent taxpayers before the Internal Revenue Service (IRS) as an enrolled agent.

A specialized tax degree and an E.A. designation is pretty strong background, but credentials don’t always get the job done.

The taxpayer’s business involved mortgage brokerage, real estate brokerage, and tax preparation. The taxpayer argued that the time he spent as a mortgage broker counts as a “real estate trade or business,” enabling him to treat rental losses as non-passive and therefore deductible.

Some background. The tax law treats rental losses for most taxpayers as automatically passive, and therefore deductible only to the extent of “passive” income or at the time the “passive activity” is sold.

Business activities other than real estate rental are not automatically passive. Taxpayers can avoid the passive loss rules if they “materially participate” in the activity. This is based on the amount of time spent on the activity.

If you qualify as a “real estate professional,” your real estate losses are not automatically passive; they are tested as passive or non-passive based on the tests used for other businesses. But it is hard to be a real estate pro under these rules:

-You have to spend at least 750 hours a year working in a “real estate” trade or business, and

-Your real estate time has to exceed the time you spend doing non-real estate work.

This second test keeps most people from being real estate pros, as its hard to convince the IRS or the courts that you have a 2000-hour full time job but that you spend more time than that managing real estate.

The taxpayer in this case said his mortgage brokerage was a real estate business:

According to petitioners, petitioner’s mortgage brokerage activity is a “real property trade or business” within the meaning of section 469(c)(7)(C). Petitioners go on to argue that because petitioner spent more than 750 hours providing services in connection with his mortgage brokerage business for both years in issue, and because he spent more time in that business than he did in any other trades for business during each of those years, for both years in issue he is a [real estate professional]…

This is the first time I’ve seen mortgage brokering treated as a “real estate” trade or business. The Tax Court ponders the question (my emphasis):

Section 469(c)(7)(C) defines a real property trade or business to mean “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.” Petitioners focus on the word “brokerage” contained in that section and argue that petitioner’s mortgage brokerage business is contemplated by the statute. We disagree. Petitioners’ argument ignores the words “real property” that precede the specific activities listed in the statute; those words modify each of those activities. While petitioner’s mortgage brokerage activity constitutes a “brokerage” trade or business, it does not constitute a “real property brokerage” trade or business. Petitioner was not during either year in issue brokering real estate; he was brokering financial services.

The court was unconvinced that the taxpayer met the 750-hour test without counting the mortgage brokerage time, so the rental losses were passive and disallowed. The issue was novel enough, though, for the taxpayer to avoid penalties.

The Moral? Credentials are helpful to a tax preparer, but they aren’t always enough to convince the Tax Court to see things your way.

Kansas is on the right track by broadening its tax base and lowering its rates, but should be cautious about favoring some businesses over others. A better path to encouraging economic growth is creating a tax environment that is not overly burdensome and treats all businesses well. Further, while tax reductions can have positive economic benefits, they will cost revenue and will ultimately have to be paid for either by cutting spending or increasing taxes elsewhere.

If Iowa ever gets around to much-needed business tax reforms, Kansas will provide a good bad example.

Paul Neiffer, IRS Interest Rates Finally Start to Rise. “It seems like forever that the interest that the IRS will pay or collect on tax refunds/underpayments has been stuck at 3%. The IRS just announced today that beginning April 1, 2016, the interest rate will rise to 4% for most taxpayers.”

Almost Coupled. Both houses of the Iowa General Assembly passed the bill to couple the Iowa tax law to federal tax law for 2015, with the exception of bonus depreciation (HF 2433). The House of Representatives vote was overwhelming, and the Senate was unanimous.

The debates before the votes featured complaints about how school funding is suffering because businesses get the same Section 179 deduction on their Iowa returns as on their federal returns. Yet not one school-funder mentioned any other ideas about finding additional $97.6 million funding lost to the Fiscal 2016 budget. For example:

The bill also repeals the manufacturing supplies sales tax rule set forth by the Department of Revenue that was set to take effect in July. It replaced it with the manufacturing supplies tax exemption passed by the house in 2014, only to die in the Iowa Senate.

In addition to Section 179 coupling, the bill also allows on Iowa 1040s a number of other provisions enacted by Congress in December, including:

The Des Moines Register coverage of yesterday’s votes makes it appear that the Governor is on board, though he hasn’t said so in so many words. It quotes spokesman Ben Hammes:

“As the chief executive, it is the governor’s job to look at how this bill fits into the bigger budget picture and how it will impact jobs and Iowa taxpayers and he will review it accordingly. The governor is pleased that the Legislature was able to come together and find resolution on these key issues,” Hammes said.

So he doesn’t exactly say he’ll sign. I think he will, but I will feel better when he does.

Unfortunately, the bill only applies to 2015, so we have to do it all again next year.

Coupling day in the General Assembly. The bills to couple Iowa’s 2015 tax law with federal 2015 tax changes (HF 2433 and SF 2303) are scheduled for debate today in the Iowa House and Senate. I expect them to pass easily. The Governor is on vacation in Florida, but GlobeGazette.com reports that he “is expected to return to Iowa later this week” and sign the bill. We will update this post if and when the votes come down.

Update, 3:40 p.m.:The Senate passes the House bill without amendment, 50-0. On to the Governor.

Deadline day! Corporation returns are due today. Also due are two key international tax forms, for trusts and withholding on interest, dividend and other non-business income paid to foreign taxpayers. Russ Fox has more on that.

Take care to document that you are filing your returns or extensions timely. E-file is best if you can, as you have no worries about mail truck mishaps. If you file on paper, Certified Mail, Return Receipt Requested, is the tried-and-true way to prove you filed your returns on time.

Worst Golf Partner Ever. Arnold Palmer, the famous golfer, did less well in the auto business, thanks to a partner involved in a Tax Court case released yesterday. The companies, BOH and APAG, were funded in part by Mr. Palmer. Judge Nega sets the stage:

Petitioner began siphoning money from Arnold Palmer Motors, Inc., as early as October 1985. When one dealership ran short on cash, petitioner transferred money from another dealership to cover the shortfall. Rather than transferring funds directly between dealership accounts, petitioner routed transfers through his personal bank account. Petitioner routinely kept some of the transferred funds in his own account instead of transferring them to the appropriate dealership. Messrs. Palmer and McCormack did not authorize petitioner to take money from the dealerships.

The bad partner diversified into stealing from other S corporations funded by Mr. Palmer and others, but in which he held a 1/3 interest. After some time he was caught, and the tax man came calling.

The taxpayer took a bold tax return position. You need basis in an S corporation to take losses. Loans you make to an S corporation can create basis for taking losses. The taxpayer said that he made loans to the corporations he was stealing from, giving him basis.

The Tax Court found this improbable (my emphasis):

The record contains no evidence reliably establishing petitioners’ bases, if any, in the Arnold Palmer dealerships or their entitlement to NOLs arising therefrom. Petitioners have not provided any Forms 1120S, U.S. Income Tax Return for an S Corporation, or Forms 1065, Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., for any of the Arnold Palmer dealerships in which petitioner was a one-third shareholder. They contend that he contributed “significant funds” to the dealerships but do not identify any specific dollar amounts contributed. In contrast, the record reflects that petitioners misappropriated amounts in excess of $6 million from the Arnold Palmer dealerships during the late 1980s which they did not report on their 1988 or 1989 income tax return.

As you may guess, the Tax Court ruled against the taxpayer, big time, with 75% civil fraud penalties.

I assume, dear reader, that you aren’t stealing from your employer. If you are, you should be reading another tax blog. But even non-thief readers can draw a lesson. You need basis to take an S corporation loss, and you need the records to show it. The taxpayer here was claiming losses from net operating loss carryforwards created by alleged S corporation losses. He failed to provide sufficient records from the loss years to convince the Tax Court.

The Moral? If you are claiming loss carryforwards, you need to preserve the tax records for the years in which the losses arise, and all intervening years, to document your right to the losses. That’s true even though the statute for limitations for the loss years has expired. Net operating losses carry forward for 20 years. That means you may need to maintain the records for the loss years for 23 years — and for all of the years in between — if you take 20 years to use them up.

Here’s how the new scam works. The scammer calls you and says that are with the IRS and have your tax return. They then say they need to verify some information to process your return. Those details generally involve asking for your personal information such as a Social Security number or personal financial information, such as bank numbers or credit cards.

To make the scam appear legitimate, scammers often alter caller ID numbers to make it look like the IRS or another government agency is calling. The callers may refer to IRS titles, fake names and fake badge numbers. They may know your name, address and other personal information that they offer to make the call sound official.

Be careful, and remember: if the caller says he’s from the IRS, he’s lying.

A patent box, or “innovation box,” is a tax policy that provides a lower tax rate on income related to intellectual property. The stated goal of a patent box is to promote research and development, encourage companies to locate intellectual property in the country with the incentive, and to make a country’s tax code more internationally competitive.

Just as the research credit is an incentive to call more of what you do “research,” the patent box would end up broadening the definition of intellectual property income. The only innovation it would generate would be on the part of the same sort of specialty companies that make their living doing research credit studies.

Renu Zaretsky, Only Thirty-three days till Tax Day! Today’s TaxVox headline roundup covers tax refund statistics so far this season and the hiring by H&R Block of a former senator as a lobbyist for increasing barriers to competition and H&R Block profits through regulation of (other) tax preparers.

Coupling! We expect the Iowa General Assembly to pass the 2015 tax coupling bills this week, and the Governor is expected to sign. You can follow their progress at the General Assembly site. The extender bills have been renamed SF 2303 and HF 2433.

We will be following the developments and will post news as it happens.

March 15 looms. Tomorrow is the first real big deadline of the filing season. Corporate 1120 and 1120-S corporation returns are due.

If you can file on time, you should extend. The penalties for late filing without an extension can be painful, and you may miss the opportunity to make important elections that are only available on a timely-filed original return.

But it’s not just federal returns. While many states, like Iowa, have April due dates for corporations returns, 23 states want the returns on March 15. Even if you are filing an S corporation return, where the corporation itself doesn’t file, many states require payment anyway — either as a misbegotten corporation tax, as in California, or as withholding on individual income taxes of non-resident shareholders.

Source: RIA Checkpoint.

Extensions can be tricky too. Many states either accept the federal extension or, like Iowa, automatically extend a return if the tax for the year is sufficiently paid by the original due date. But other states require a separate extension filing. States requiring a separate extension filing, even when no payment is due, include Arkansas, Connecticut, D.C., Florida, Massachusetts, Maryland, Michigan, Missouri, North Carolina, North Dakota, Nebraska, New Hampshire, New Jersey, New Mexico, New York, New York City, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont and West Virginia.

It’s already late — don’t put off those extensions any longer.

Gretchen Tegeler, Can taxpayers ever get a break? (IowaBiz.com). “Alas, even the best-intentioned measures can be twisted into an argument to compound the taxpayer burden.”

Jason Dinesen, Glossary of Tax Terms: Pass-Through Entity, “In tax terminology, a pass-through entity is a business where the end results of operations ‘pass through’ to the owners and are reported on the owners’ personal tax returns.”

To the floor. Identical bills coupling Iowa’s tax law to federal changes enacted in December cleared the taxwriting committees in each house of the General Assembly yesterday, the day after the bills were introduced. The bills (SSB 3171 and HSB 642) will be eligible for floor vote next week.

The sudden breakthrough clears the way for thousands of Iowans to complete their tax returns with the full $500,000 maximum Section 179 deduction. Thousands more will get to take other benefits, including the $250 above-the-line deduction for educator expenses, deductions for student loan interest, and charitable distributions by IRAs for older taxpayers.

“It certainly is a significant step in the right direction,” Branstad told reporters this morning. “…I always reserve judgment until I see it in its final form, but it appears from what I’ve heard to be something that resolves some big differences of opinion between the two houses and hopefully will make it possible to move forward with our other priorities.”

The coupling process is unfolding as I predicted February 26, after Governor Branstad reversed his anti-coupling stand. It’s too bad we couldn’t have gotten this far much earlier, without disrupting filing season. Better late than never, though. Unfortunately, the coupling is for one year only, so we can look forward to a repeat show next year.

File or extend that 1120-S on time! The returns for calendar-year S corporations are due on Tuesday. If you can’t file on time, be sure you extend, because the penalties have gone up. From the IRS online Form 1120-S instructions:

Late filing of return. A penalty may be charged if the return is filed after the due date (including extensions) or the return doesn’t show all the information required, unless each failure is due to reasonable cause… For returns on which no tax is due, the penalty is $195 for each month or part of a month (up to 12 months) the return is late or doesn’t include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation’s tax year for which the return is due.

You can also get in trouble for filing, but not sending the K-1:

Failure to furnish information timely. For each failure to furnish Schedule K-1 to a shareholder when due and each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information), a $260 penalty may be imposed with respect to each Schedule K-1 for which a failure occurs. If the requirement to report correct information is intentionally disregarded, each $260 penalty is increased to $520 or, if greater, 10% of the aggregate amount of items required to be reported.

Extending your return gives you until September 15 to get that information out. A 10-person S corporation incurs a $1,950 fine for being one day late, and it increases each month. The extension, filed on Form 7004, is automatic, and can be e-filed.

Rant: I despise the use of fines like this as a government funding method. Dinging a one-day timing violation is like the red-light cameras that ding you for not quite stopping before turning right at an empty intersection. No harm, no foul, but pay up, peasant.

The scam, which involved fake emails purportedly sent by top company officials, convinced the companies involved to send out W-2 tax forms that are ideal for identity theft. For instance, W-2 data can easily be used to file bogus tax returns and claim fraudulent refunds.

The embarrassing breakdowns have prompted employers to apologize and offer free credit monitoring to employees. Such measures, however, won’t necessarily shield unwitting victims from the headaches that typically follow identity theft.

Update, 10:23 a.m. The Senate Ways and Means Committee cleared SSB 3171 this morning unanimously, according to the Iowans for Tax Relief Twitter feed. They also report that House Ways and Means is meeting now to discuss HSB 642, which I believe is identical to SSB 3171.

Update, 11:30 a.m. O. Kay Henderson posted Statehouse leaders announce tentative deal on taxes. Looking at the statements, it appears that the deal is between leaders of the two legislative chambers, with Governor Branstad as a bystander. Makes me nervous, but I assume they wouldn’t go to the trouble without having the Governor on board somehow.

A deal, maybe. A bill rumored as the outline of a bi-partisan deal coupling 2015 federal tax changes to the Iowa income tax law was introduced by chief Senate taxwriter Joe Bolkcom yesterday. SSB 3171 would allow taxpayers to deduct up to $500,000 of equipment purchases on their 2015 Iowa returns that would otherwise be capitalized and depreciated over a period of years. This would match up the 2015 Iowa maximum “Section 179” deduction to the amount enact in December for 2015 and beyond in federal law. It would also enact for 2015 Iowa returns a number of other “expired” provisions, including:

The matching would only be for one year. The price to get Senate Democrats to go along would be repeal of the sales tax administrative rules for manufacturers set to take effect July 1. They would be replaced by a smaller sales tax break passed by the Iowa House in 2014 that died in the Senate.

Iowa is not expected to couple with federal bonus depreciation.

While rumors say that this is close, with legislative movement likely as early as today, there remains uncertainty. The Governor is said to be unhappy with the deal, and he will go along only grudgingly, if at all, according to people I’ve heard from.

“We’re ready to move ahead with those three elements: the coupling, rescinding the governor’s rules and picking up the consumable supplies bill that the House passed in 2014. That would be in one package,” Bolkcom said.

Republicans who control the Iowa House and Democrats who hold a majority in the Iowa Senate also were working to resolve a dispute over state funding for schools with negotiators looking at a deal that could boost state aid in fiscal 2017 by 2.25 percent and provide other categorical increases that would bring the overall funding growth closer to 2.5 percent, according to legislators close to the talks.

“There’s no deal yet, but we are meeting with House Republicans on the big issues,” said Sen. Bob Dvorsky, D-Coralville, chairman of the Senate Appropriations Committee, who declined to discuss specific numbers. “The good news is we are meeting and talking.”

The sales tax exemption has been a sore point with Senate Democrats since it was proposed by the Department of Revenue. Going with the 2014 house-passed language (HF 2443) reduces the break, giving the Senate Leadership a symbolic victory. Still, the 2014 death of HF 2443 indicates that they really didn’t want to keep any of the rule changes.

I haven’t figured out exactly what parts of the sales tax exemption will be lost under the bill introduced yesterday. The exemptions for items such as jigs, tools, dies, coolants and lubricants would survive.

This issue will be back next session. Even if the compromise passes, the section 179 coupling issue will be up again next year. SF 3171 is only for one year, while the federal legislation makes the federal change permanent. There seems to be no discussion yet of cutting back corporate welfare tax credits to “pay for” the Section 179 deduction used by 25,000 Iowa farmers and small businesses. Maybe next year.

Tax experts generally recommend that sales taxes apply to all final retail sales of goods and services but not intermediate business-to-business transactions in the production chain.

That’s the tragedy about scaling back Iowa’s manufacturing exemption. Rather than scaling it back, the legislature should be looking to expand it to other business inputs.

Paul Neiffer, Two Opportunities for Farm and Estate Tax Education. While Roger McEowen will sadly no longer be part of the Iowa State University Center for Agricultural Law and Taxation, he will continue to teach his summer seminars: this year in Alaska and North Carolina. These are excellent seminars in nice settings, and a nice way to mix continuing education with leisure.

Jason Dinesen, More on Business Proactive Planning in the Real World. “The thing the “experts” miss is, most of us are trying to be proactive … but it’s hard when the client won’t be an active participant in the process.” I find that some clients want you to be pro-active, as long as you don’t charge any time for it.

Cara Griffith, Should Tax Settlement Agreements Be Publicly Available? (Tax Analysts Blog). “Yet if it is conventional wisdom that good cases settle while bad cases go to trial, isn’t there a lot that could be learned if lawsuit settlements were made available for public scrutiny?” The good thing is that it would shine light on “secret” law. The bad news is that it might make deals harder to reach.

It’s not enough to get robbed; you have to time it right. A “pump-and-dump” securities fraud victim claimed a theft loss deduction. The IRS said “yep, you were robbed.” But they also said that they didn’t time their robbery deduction properly, and therefore were out of luck. And, it turns out, they were.

There is no dispute that plaintiffs discovered the theft loss in 2002.31 And, neither plaintiffs nor defendant disputes that in 2002, there existed “a claim for reimbursement with respect to which there [was] a reasonable prospect of recovery Plaintiffs filed their arbitration claim against Donald & Co., Mr. Stetson, Mr. Volman, and Mr. Ingrassia in February 2002, and by the end of that year, they had neither sought to adjourn the proceedings nor withdrawn their claim. Accordingly, in light of the ongoing arbitration proceedings, plaintiffs could not claim a theft loss deduction in 2002. Instead, they were required to delay their deduction until the “year in which it [could] be ascertained with reasonable certainty whether or not” they would receive reimbursement of their losses from their arbitration claim. Plaintiffs determined that the proper year to claim their theft loss was 2004, and filed amended federal income tax returns reflecting the deduction. The IRS disallowed plaintiffs’ refund claim, and takes the position in this litigation that 2004 was not the proper year for plaintiffs to claim their theft loss deduction.

The court said the victims didn’t prove that they were entitled to the deduction:

Plaintiffs claim that they sustained the loss in 2004 because by the end of that year, they had no reasonable prospect of recovering on their arbitration claim. However, under the factual circumstances presented in this case, the test is not whether plaintiffs had a reasonable prospect of recovering on their arbitration claim in 2004, but is instead whether, in 2004, plaintiffs could have ascertained with reasonable certainty that they would not recover on their arbitration claim. To satisfy their burden under the latter test, plaintiffs were required to produce objective evidence that they abandoned their arbitration claim in 2004. They failed to do so. In the absence of such evidence, plaintiffs are not entitled to a theft loss deduction for the 2004 tax year.

The opinion doesn’t say whether the victims filed protective refund claims for subsequent years to preserve their refund rights. It would be another robbery if they were unable to get their theft loss deduction because they got the year right. The statute in such cases should allow taxpayers to recover in the proper year if the IRS successfully second-guesses the timing of a theft loss.

The Moral? If you are a fraud or theft victim, the timing of the loss deduction is very important. If the IRS disputes the loss on examination, be sure to file protective refund claims for open years to protect your rights.

Speaking of getting robbed twice: IRS shuts down ID-thief assistance portal. A week after The Tax Foundation pointed out that the IRS IP-PIN online portal made identity theft victims vulnerable to being victimized a second time, the IRS has temporarily shut it down:

As part of its ongoing security review, the Internal Revenue Service temporarily suspended the Identity Protection PIN tool on IRS.gov. The IRS is conducting a further review of the application that allows taxpayers to retrieve their IP PINs online and is looking at further strengthening the security features on the tool.

Nothing to see here, move along.

Work Opportunity Credit guidance updated for retroactive 2015 credits. Congress re-enacted the expired Work Opportunity Tax Credit retroactively for 2015. To claim the credit for hiring certain classes of hard to employ workers, employers have to get the employee eligibility verified within 28 days. As this was impossible for an expired credit, the IRS yesterday gave employers until June 29 of this year to get the certification for 2015 hires (Notice 2016-22)

Keith Fogg, Making Claims and Spending Refunds in Bankruptcy. “The 9th Circuit recently affirmed the district court opinion granting summary judgment to the IRS in a case brought by Mr. Stanley Burrell aka M C Hammer seeking to equitably estop the IRS from collecting on taxes for two years which it failed to include on the proof of claim in his bankruptcy case.”

Stuart Gibson, Competition Policy and Tax Policy in The Twilight Zone (Tax Analysts Blog). “From a tax perspective in the U.S. (and probably Europe), this is simply a garden-variety case of a taxpayer negotiating a good deal with a foreign tax authority. From a European competition perspective, the answer is a bit more complicated.”

On one hand is the legislature’s
desire to support small business owners and farmers who could use any extra money from the tax break to buy more equipment, make renovations or hire more employees.

On the other hand is the concern that Iowa needs to tighten its belt financially and focus on bolstering other priorities such as school funding, rather than giving away tax revenue.

What other priorities might there be for the $95 million or so “lost” to Section 179 besides school funding? How about this:

The Register article includes this item that attempts to show that Section 179 isn’t a big deal:

Only about 25,000 Iowa taxpayers in 2014 made a Section 179 claim of more than $25,000, according to numbers from the Iowa Department of Revenue. About 12,000 were farmers.

By comparison, the state Department of Revenue processed 1.58 million individual income tax returns for 2014.

“Only” 25,000? That works out to 252 businesses in every county that are seeing a tax increase to feed that $95 million to the Iowa treasury. Meanwhile, the state pays about $42 million in actual cash subsidies through the Iowa Research Activities Credit to a handful of businesses that each claim over $500,000 in credits. Of that, about $29.5 million goes to only eight taxpayers. 25,000 is a lot more than 8.

With its focus on spending, the Register story misses a huge point: the Iowa income tax favors well-connected insiders who know how to play the tax credit game, to the detriment of the 25,000 smaller businesses that would benefit from Section 179 coupling. Rather than remedying the inherently corrupt tax credit game, the state is giving out more special interest credits left and right.

I have to ask the NAPA: What were you thinking? Yes, Mr. Koskinen has served for many years, and he may have generosity of spirit. But as Congressman Jason Chaffetz said, “If obstructing a congressional investigation and misleading Congress merits an award, then it seems like they have the right guy. I guess I define excellent public service differently.”

In fairness, I think he’s doing exactly what the man who appointed him wants him to do.

Norton Francis, The Perils of Tax Incentives for Economic Development (TaxVox). “And if every state is offering subsidies, one wonders whether they are engaged in a form of economic mutually-assured destruction, where the subsidies are pure windfalls to firms that have little effect on their decisions to move.”